Buyers hoping to purchase condos have been under more stringent lending regulations over the past three years, initially under temporary guidelines that were later made permanent. The regulations were put in place to ensure the condo units, as well as the entire building, are up to code structurally and there are no outstanding critical repair requirements. These regulations are intended to protect the consumer from buying into a faulty building and thereby protecting their investment, but as well, will protect lenders from funding loans on properties at risk of diminishing value due to disrepair. As with any tightened policy, however, the buying process is officially more cumbersome.
In October 2021, Fannie Mae and Freddie Mac announced their Temporary Requirements for Condo and Co-op Projects as a result of “concerns about projects with significant deferred maintenance [and] these requirements apply to all loans secured by units in projects with five or more attached units, regardless of the type of project review or review waiver.” These concerns stemmed from the Champlain South Tower collapse in Surfside, Florida, an avoidable tragedy if the building’s structural integrity was properly monitored and maintained. The temporary changes were effective on January 1, 2022 and were the beginning of more nuanced condo purchases. Buyers and buyer agents alike needed to be keenly aware of how the new regulations would impact the purchase of a condo in any building over 5 units.
As Fannie Mae’s “ongoing commitment to risk management [to make] condos a more sustainable and affordable homeownership option for many borrowers,” they updated their requirements in their Selling Guide Announcement, essentially a more permanent version of the initial regulations, which were effective on or after September 18, 2023. These regulations included two changes, the first to Significant Deferred Maintenance/Special Assessments and second to Insurance Deductibles.
Significant Deferred Maintenance/Special Assessments
The first guideline in place for borrowers to obtain financing on condo loans is that eligibility needs to be determined based on information about any significantly deferred maintenance. The purpose of these regulations is to identify:
- Critical Repairs: Repairs and replacements that significantly impact the safety, soundness, structural integrity, or habitability of the project’s building(s) and/or that impact unit values, financial viability, or marketability of the project.
- Significant Deferred Maintenance: Significant deferred maintenance includes deficiencies that meet one or more of the following criteria:
- full or partial evacuation of the building to complete repairs is required for more than seven days or an unknown period;
- the project has deficiencies, defects, substantial damage, or deferred maintenance that is severe enough to affect the safety, soundness, structural integrity, or habitability of the improvements;
- the improvements need substantial repairs and rehabilitation, including many major components; or impedes the safe and sound functioning of one or more of the building’s major structural or mechanical elements, including but not limited to the foundation, roof, load-bearing structures, electrical system, HVAC, or plumbing.
- Special Assessments: The lender is expected to obtain the financial documents necessary to confirm the association has the ability to fund any repairs. If the special assessment is related to safety, soundness, structural integrity, or habitability, all related repairs must be fully completed or the project is not eligible. Additionally, If the lender or appraiser is unable to determine that there is no adverse impact, the project is ineligible.
Insurance Deductibles
The second updated guideline is with respect to insurance deductibles. Both Fannie Mae and Freddie Mac cap the insurance deductible at 5% of the total coverage but with rising insurance premiums we’re observing a greater number of master insurance policies incorporating a per-unit deductible in addition to the standard deductible. Essentially, insurance providers are transferring some of the risk from the master policy to the individual unit owner’s H06 policy. This strategy helps decrease the overall annual premium for the master policy but with Fannie/Freddie’s deductible cap of 5% there is an increasing trend of financing denials. See the example below.
- 33 Units
- Building Coverage = $11,359,921
- Master policy has a $25,000 deductible but also has a $25,000 per unit deductible on top of that
- 33 units x $25,000 = $825,000
- $825,000 divided into $11,359,921 = 7.2%, which exceeds 5%
In this example, the per unit deductible for the entire building exceeds the allowable 5% cap, so any buyer applying for a mortgage would be denied financing.
What can be done by buyers or buyer’s agents to help navigate these two changes?
It’s always highly recommended and in the buyer’s best interest to have a buyer’s agent working on their behalf. But in circumstances like this, it’s almost essential so that what seems to be a convoluted process ends up being a lot less stressful than it could be.
From the very beginning buyers and their agents will need to be aware of these regulations and keep a discerning eye on the age of the building in which they’re looking at condos. A newer condo building may be more up-to-date with fewer deferred maintenance action items. Regardless of the age, however, one of the most important things is for buyer’s agents to obtain the condo documents, which includes the budget, meeting minutes, declaration of insurance, etc., as early as possible. The hope is that the listing agent already has access to these items to have them more readily available for buyers.
There is usually a few hundred dollar cost associated with obtaining these documents, and it’s not always clear if it’s the seller or the buyer who should pay that fee. Either way, buyer’s agents will be able to help the buyer search for condos with these regulations in mind to help mitigate any financial surprises when applying for financing.
If you’re interested in finding a condo with a highly trained REALTOR® in your corner to ensure the smoothest transaction possible, contact me today.